WASHINGTON (Reuters) — U.S.
manufacturing output recorded its largest increase in six months in
February and factory activity in New York state expanded early this
month, the latest signs the economy was gaining momentum after being
dampened by severe weather.

Monday's fairly upbeat factory data should encourage the Federal
Reserve to further scale back its monetary stimulus this week, even
though a separate report suggested the housing sector would take a
while to pull out of its recent soft patch.

"The economy's engines are starting back up after a cold January. It
makes us more confident the economy will continue to move forward as
the year progresses," said Chris Rupkey, chief financial economist
at Bank of Tokyo-Mitsubishi UFJ in New York.

Factory production increased 0.8 percent in February, its largest
advance since last August, after a 0.9 percent January drop, the
Federal Reserve said. Economists had expected a gain of 0.2 percent.

In a separate report, the New York Fed said its "Empire State"
business conditions index, which measures factory activity in the
state, rose to 5.61 in March from 4.48 in February. New orders,
shipments and inventories all increased.

The manufacturing data added to evidence from retail sales to
employment that has suggested the economy was regaining strength
after a an abrupt slowdown at the end of 2013 and early this year,
as an unusually cold winter took its toll.

Still, growth in the first quarter is expected to be quite a bit
weaker than it was in the final three months of last year as
businesses work through a pile of unsold goods. Last month, the
government estimated the economy expanded at a 2.4 percent annual
rate in the fourth quarter, but that figure is expected to be
revised to about 3 percent next week.

But with job growth accelerating and manufacturing output
rebounding, economists expect the Fed to announce another $10
billion reduction to its monthly bond purchases when policymakers
conclude a two-day meeting on Wednesday.

"The gains should be enough to reassure policymakers at the Fed that
the economy continues to make forward progress," said John Ryding,
chief economist at RDQ Economics in New York.

HOUSING SEEN LAGGING

Stocks on Wall Street rallied on the data and easing concerns over
the situation in Crimea. The U.S. dollar fell marginally against a
basket of currencies and prices for U.S. Treasury debt slipped.

A third report showed sentiment among homebuilders edged up in
March. Builders were, however, pessimistic about sales over the next
six months. They also worried about shortages of lots and skilled
labor, and rising prices for materials.

"This corroborates reports of a decline in orders from some of the
big homebuilders recently, although land shortages may be playing a
part," said Jennifer Lee, a senior economist at BMO Capital Markets
in Toronto. "This suggests some caution on the new home sales and
housing starts front."

Housing activity has slowed considerably since last summer, when
mortgage rates spiked. Though borrowing costs have eased a bit, high
home prices because of tight inventories are making houses less
affordable, especially for first-time buyers.

Motor vehicle output rebounded 4.8 percent last month after tumbling
5.2 percent in January, the Fed said in its report. There were also
notable gains in the production of machinery and fabricated metal
products.